That a commercial contract is international may seem intuitive to some observers, yet it is difficult to find an accepted definition for the term. What is even more difficult is identifying the legal rules to which international commercial contracts are subject. Are international contracts subject to some sort of international law? What are the sources of this law and what is its scope of application? To the extent that international contracts are subject to national rules, which law’s rules are applicable? These questions become even more pressing when the practice of international contracting is taken into consideration: contracts are often written as if their terms were the only source with which to regulate the parties’ relationship and as if any sources of law were irrelevant. This self-sufficiency is attempted through drafting the contract in great detail, by writing clauses that attempt to exclude any interference from external sources and by stipulating that disputes between the parties shall be solved out of court via arbitration. Contracts tend to be drafted in the same way, irrespective of the legal system in which they will be implemented. Ambitions regarding self-sufficiency, standardisation and arbitration clauses make one wonder about the relationship between the contract and the governing law.

This book will analyse the interaction between international commercial contracts and the sources that govern them.

In Chapter 1 I will present the practice of international contract drafting and will highlight how its peculiarities may fit with the applicable sources of law when a contract has to be interpreted and enforced.

In Chapter 2 I will go through the most important sources of non-national law and will analyse to what extent they may contribute to the harmonised interpretation and regulation of international contracts.

In Chapter 3 I will examine how international contracts may be influenced by the national governing law.

In Chapter 4 I will discuss how the governing law is chosen and what role the will of the parties has in this process.

In Chapter 5 I will analyse the extent to which the role of the parties’ will is enhanced when the contract stipulates that any disputes arising between the parties out of the contract shall be solved by arbitration.

Before starting the analysis of the role played by the parties’ will and by the applicable sources of law in the interpretation and enforcement of international contracts, however, it is necessary to define the starting point of the analysis; namely, international commercial contracts.

Two elements require explanation: the term ‘commercial’ and the term ‘international’.

I.1 Explanation of the Term ‘Commercial’

To explain the term ‘commercial’ it will be sufficient here to specify that it refers to transactions entered into between parties in the course of their business activities. This leaves consumer contracts outside of the scope of the subject, as well as other aspects of private law, such as family or inheritance law. It is not the intention here to contribute to the old and extensive debate, which seems particularly to characterise some civil law legal traditions, concerning the difference between private law and commercial law; the difficulty in defining precisely the term ‘commercial’ appears clearly in the explanation of the term provided by the Model Law on International Commercial Arbitration made by the United Nations Commission on International Trade Law (UNCITRAL), which, in footnote 2 relating to Article 1, uses a tautology; that is, it explains the term ‘commercial’ by referring to the same concept, without imparting any additional explanation other than a long, non-exclusive list of transactions that are deemed to be of a commercial nature:

As unsatisfactory as it may be to operate with a non-exhaustive list rather than with a clear definition of the scope of the content, we will follow the guidelines laid down by UNCITRAL, and will consider the kinds of transactions listed as the object for this book.

This seems to cover only private law matters and leaves out questions of public law. However, this distinction is not clear cut. Leaving aside that the private–public law divide is not necessarily recognised in all legal systems (notably, not in the common law tradition), there are aspects of public international law that may well be relevant to commercial activity, as mentioned in Section I.3 of this Introduction. In particular, this book will, when relevant, consider investment arbitration.

I.2 Explanation of the Term ‘International’

As far as the term ‘international’ in the name ‘international commercial law’ is concerned, there are two possible interpretations: (i) the law is international because it stems from international sources; or (ii) it is not the law that is international, but the object that the law regulates. Although the former is not completely irrelevant, as mentioned in Section I.3 of this Introduction, it is the latter construction that correctly describes the subject of this book. We will focus on the law that governs international commercial relationships; however, the definition of ‘international’ varies according to the criteria used by the interpreter. Different state laws and different international conventions have different definitions of what international is.

For example, the Vienna Convention on Contracts for the International Sale of Goods of 1980 (also known as the CISG) specifies, in Article 1.1, that a sale falls within the scope of the Convention (and therefore is to be deemed as international) if the parties have their place of business in different states:

Therefore, under the CISG, a contract between, for example, a French seller and a Norwegian buyer, is considered an international contract. A contract between two companies based in France, however, would not be considered international under the CISG, even if the contract requires one party to import certain goods from a foreign state to sell them to the other party.

The Hague Convention on the Law Applicable to International Sales of Goods of 1955Footnote ² does not define the term international, and simply states in Article 1 that the mere determination by the parties is not sufficient to give a sale international character (indirectly accepting that a sale may be international if there are some foreign elements to the transaction, but that this is not necessarily the place of business of the parties):

Therefore, a contract between two Italian parties for the sale of a product manufactured in Italy according to which both delivery and payment will be made in Italy, will not qualify as international under the Hague Convention, even if the contract has a clause choosing German law as the law governing the transaction. However, the abovementioned contract between two French companies for the import and successive domestic sale of certain goods might be considered as international for the purpose of the Hague Convention because there is a foreign element involved in the import of the goods.

The EU Rome I Regulation on the Law Applicable to Contractual Obligations (Regulation EC 593/2008 of 17 June 2008), which is the European Union’s (EU’s) instrument regulating the choice of law for contracts, speaks in Article 1.1 of any situation involving a conflict between the laws of different states; thus, indirectly, it opens the door even for the eventuality that the only foreign element to a transaction is the choice made by the parties of a foreign law – although, in such situations, the applicability of party autonomy, which is the most important conflict rule contained in the Regulation, is limited by Article 3.3 thereof:

1. 3.3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

Therefore, the abovementioned import and subsequent domestic sale between two companies based in France would fall within the scope of Article 1.1 of the Rome I Regulation and allow for a wide choice of law, as regulated for in Article 3.1, because the import of the goods is an element that connects the situation with more than one state. The domestic contract between the two Italian companies mentioned, however, even though it falls within the scope of Article 1.1, would be subject to Article 3.3 of the Rome I Regulation, and would allow a more restricted party autonomy (see, however, Section 1.2, for a restrictive interpretation of this provision).

The UNCITRAL Model Law on International Commercial Arbitration defines an arbitration as international if one or more conditions are met, including the mere determination by the parties that the subject matter of the dispute relates to more than one state, see Article 1.3:

An arbitration is international if:

1. (a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different states; or

2. (b) one of the following places is situated outside the state in which the parties have their places of business:

1. (i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

2. (ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or

1. (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one state.

Therefore, a dispute arising out of the abovementioned domestic agreement between two Italian companies would qualify as international for the purpose of the UNCITRAL Model Law if the parties have chosen a foreign governing law or a foreign state as a venue for the arbitration.

Bearing in mind these discrepancies, and that it is therefore necessary to verify in each specific case (on the basis of the applicable law) whether the transaction is international or not, it will suffice for the purpose of this book to define a transaction as international whenever there is a foreign element to it that connects it with at least two different states.

The most evident example would be a contract entered into by two parties that are resident in different states: for example, an Italian clothes producer entering into an agency contract with a Norwegian agent for the promotion and sale of products in the Norwegian territory, or a Russian aluminium producer entering into a contract for the export of its products to Norway.

There might be, however, less evident cases, where an inquiry is necessary before the transaction may be defined as either international or domestic. Where a contract is entered into between a company located in a certain state and the local, wholly owned subsidiary of a foreign company, for example, some state laws will permit disputes connected therewith to be defined as international,Footnote ³ whereas others focus on the formal aspect of the common nationality of the parties and consider the disputes to be domestic.Footnote ⁴

I.3 The Public International Law Dimension

Public international law is the branch of the law that regulates the relationship between states. States are sovereign and are therefore free to regulate their internal affairs through legislation, administrative regulation and the exercise of the judicial function; their sovereignty, however, does not extend beyond their respective territory. In terms of their relationship with other states, when states act as sovereign states and need to determine their respective positions towards each other, they are subject to the principles and rules of public international law.

A state does not act as a sovereign when it engages in commercial activity, and public international law, therefore, is not relevant. Commercial transactions will be subject to commercial and private law, even when one of the parties involved is a state. Generally, there is no overlap between these branches of the law.

In some situations, however, there is interference. This happens mainly when an investor engages in a business activity in a foreign country. The investor will enter into a series of contracts of a commercial nature with other private parties, or even with the host state, and these contracts will be subject to private or commercial law in accordance with the rules of private international law. The investor’s activity will, in addition, have a series of implications in terms of administrative or public law, and these will be regulated by the law of the host country – for example, the enterprise will generate income that is subject to the local tax law; it will perhaps involve production activities, with implications for the local environmental law; it will have employees who are subject to the local labour law; it will have access to natural resources or infrastructure subject to administrative concessions; it will have export activity subject to licensing and so on. All these regulations to which the investor is subject are part of the legal system of the host country, and the host country, in its sovereignty, legislates and administrates within these fields as it deems fit and in accordance with its evaluation of what is in the public interest. This regulatory activity is within the sovereignty of the state, and, as a general rule, it is not subject to any constraints other than the rule of law and the constitutional principles of the state itself.

Should the host country regulate these matters in a way that violates fundamental principles, for example, because it engages in discriminatory behaviour or because it confiscates property without paying compensation, it may encounter limitations being placed on it through public international law.

Public international law, particularly through treaties entered into on a bilateral or multilateral basis for the protection of investments made by nationals of one state in the territory of the other state, contains some principles that may be invoked by the foreign investor who is affected by the state’s conduct. Traditionally, individuals were not considered to be subjects of public international law and had to present their claims against the host country via their respective country of origin, mainly through diplomatic protection. This gave the process a political, rather than a legal dimension, and was not necessarily favourable to the investor. Therefore, the Washington Convention of 1965 on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) established a legal proceeding in which foreign investors could pursue their claims directly against the host country in a special arbitration proceeding – the so-called investment arbitration. This arbitration largely resembles the procedure for commercial disputes but permits the investor to raise claims based on alleged violations by the host country of its public international law obligations regarding the treatment of foreign investors, mainly based on treaties on investment protection. In the past decades, bilateral investment treaties (BITs) have proliferated, as well as some multinational treaties, giving investors the possibility of being able to directly bring an action against the host country in an arbitration form known as investment arbitration. Many of these treaties allow for the possibility of being able to choose not only a dedicated ICSID arbitration, but also forms of arbitration that are designed for commercial disputes, such as arbitration under the UNCITRAL Arbitration Rules or under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). In the past few decades, investment arbitration has been frequently used by investors and it has become a significant instrument in foreign business activity. Investment protection does not fall within the scope of this book, but investment arbitration will be mentioned occasionally when it is relevant.

The great number of international treaties on investment protection has led in the past decade or two to a boom in so-called investment disputes, in which foreign investors initiate an arbitration procedure against the host country by claiming that the public international law rules protecting foreign investment have been violated. For the sake of completeness, it must be pointed out that, in recent years, the boom in investment disputes has created a considerable reaction: states have withdrawn from multilateral treaties such as the 1994 Energy Charter Treaty, bilateral treaties between EU member states have been discontinued and the mechanism of investment arbitration is under scrutiny.

This public international law protection may be wrongly interpreted as encouraging international transactions in general (also those for which investment protection is not relevant) to be considered as detached from national law and subject to international law instead.Footnote ⁵

In reality, investment protection is not relevant to mere commercial relationships, and, furthermore, it does not replace national law, not even when it is applicable. Investment protection adds a corrective dimension to national law, without, however, excluding its applicability. If a certain activity qualifies as a foreign investment and enjoys the relevant protection, it will still be subject to the applicable state law, with corrections available through the fundamental principles of public international law such as non-discrimination, compensation upon expropriation, fair and equitable treatment, full protection and security. Any rules and regulations of national law that do not violate these fundamental principles will still be applicable to the investment.

However, the borderline between public international law and international commercial law is somewhat blurred, particularly in the context of transnational sources. This book will, therefore, discuss the public international law dimension when examining transnational sources that may be applicable to international contracts. Questions related specifically to investment arbitration will be touched upon only marginally, mainly in respect of investment proceedings that are carried out under commercial arbitration rules.